Press Release

DBRS Morningstar Confirms Ratings on LSF11 Boson Investments S.à.r.l. (Compartment 2), Changes Trends on to Stable from Negative

Nonperforming Loans

December 09, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings on the notes (the rated notes) issued by LSF11 Boson Investments S.à.r.l. (Compartment 2) (the Issuer) and changed the trends to Stable from Negative.

-- Class A1 at A (low) (sf)
-- Class A2 at BBB (high) (sf)
-- Class B at BB (high) (sf)
-- Class C at BB (sf)

The ratings on the Class A1 and Class A2 notes (together, the Class A notes) address the timely payment of interest and the ultimate repayment of principal by the final legal maturity date. The ratings on the Class B and Class C notes address the ultimate payment of interest and principal. DBRS Morningstar’s ratings do not address payments of Additional Note Payments (as defined in the transaction documents). DBRS Morningstar does not rate the Class D or Class P notes (together with the rated notes, the notes) issued in this transaction.

The notes are collateralised by a pool of secured Spanish nonperforming loans (NPLs) and real estate owned assets (REOs) originated by Banco de Sabadell S.A (Sabadell) and acquired by Lone Star from Sabadell via one of its subsidiaries, LSF11 Boson Investments S.à.r.l. (Compartment 1) (formerly LSF113 S.à.r.l.; the transferor) in December 2020 (the original purchase date). In July 2021, Sabadell and the transferor also entered into a subparticipation agreement in respect of certain nonaccelerated loans included in the portfolio. The transferor allocated all its contractual positions to the Issuer in 2021. As of the July 2021 cut-off date, the gross book value of the loan pool was approximately EUR 626.8 million and the total outstanding balance of the subparticipated loans was EUR 21.7 million. The total real estate value (REV) backing the portfolio amounted to EUR 564.9 million and mostly consisted of residential properties situated in Spain (93.8% by REV). About 5.4% of the real estate assets by value were already repossessed as of the cut-off date.

Servihabitat Servicios Inmobiliarios, S.L.U. services the secured loans and REOs. Hudson Advisors Spain, S.L.U. is the asset manager and backup administrator facilitator and, as such, acts in an oversight and monitoring capacity, providing input on asset resolution strategies.

RATING RATIONALE
The rating confirmations and changed trends follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: Assessment of the portfolio recoveries as of 31 July 2022, with a focus on: (1) a comparison of actual gross collections against the servicer’s initial business plan forecast; (2) the collection performance observed over the past months; and (3) a comparison of current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: Loan pool composition as of 31 July 2022 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The order of priority entails a fully sequential amortisation of the notes (i.e., the Class A2 notes will begin to amortise following the full repayment of the Class A1 notes unless an enforcement notice has been delivered, the Class B notes will begin to amortise following the full repayment of the Class A2 notes, and the Class C notes will begin to amortise following the full repayment of the Class B notes).
-- Liquidity support: The Class A, Class B and Class C reserve funds provide liquidity support to the respective classes of notes and currently stand at EUR 10.2 million, EUR 0.8 million and EUR 1.4 million, respectively (amounts at closing of EUR 11.0 million, EUR 1.0 million and EUR 1.8 million, respectively, and target amounts equivalent to 5.0%, 8.25%, and 11.0% of the outstanding balances, respectively).
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

Additionally, the Issuer operating expenses account, the Issuer general account, and the REO company (ReoCo) general account are aimed at providing support to both the Issuer and the ReoCo in respect of operating expenses, corporate costs, servicing fees and expenses, and subparticipation fees since inception. The accounts were funded at closing with proceeds from the issuance of the notes at EUR 1.0 million, EUR 2.0 million, and EUR 3.0 million, respectively, and they are replenished on each interest payment date (IPD) for an amount equal to the estimated budget for the following two IPDs. The total balance of the three accounts as of the August IPD was EUR 6.8 million.

According to the latest investor report dated 24 August 2022, the principal amount outstanding on the Class A1, Class A2, Class B, Class C, Class P, and Class D notes was EUR 173.9 million, EUR 20.0 million, EUR 12.0 million, EUR 16.0 million, EUR 2.0 million and EUR 376.8 million, respectively. The balance of the Class A1 notes has amortised by approximately 13.1% since issuance. The current aggregated transaction balance is EUR 600.7 million.

As of August 2022, the transaction was performing significantly above the servicer’s initial expectations. The actual cumulative collections (before servicing fees and corporate costs) was EUR 29.6 million, whereas the servicer’s initial business plan estimated cumulative collections (before servicing fees and corporate costs) of EUR 11.1 million for the same period. Therefore, as of August 2022, the transaction was overperforming by EUR 18.5 million (+166.3%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative collections (before servicing fees and corporate costs) for the same period of EUR 4.0 million at the A (low) (sf) stressed scenario, EUR 4.0 million at the BBB (high) (sf) stressed scenario, EUR 4.3 million at the BB (high) (sf) stressed scenario, and EUR 4.3 million at the BB (sf) stressed scenario. Therefore, as of August 2022, the transaction was overperforming compared with DBRS Morningstar’s initial stressed expectations.

The updated DBRS Morningstar A (low) (sf), BBB (high) (sf), BB (high) (sf), and BB (sf) rating stresses assume haircuts of 40.2%, 39.1%, 34.6%, and 33.5% to the servicer’s executed business plans, respectively, considering future expected collections (before servicing fees and corporate costs).

The final maturity date of the transaction is 30 November 2060.

The Coronavirus Disease (COVID-19) and the resulting isolation measures had caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in commercial real estate prices for certain property types.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 19 September 2022. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/402907/baseline-macroeconomic-scenarios-for-rated-sovereigns-september-2022-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

For more information on DBRS Morningstar considerations for European NPL transactions and Coronavirus Disease (COVID-19), please see the following commentaries:
https://www.dbrsmorningstar.com/research/402357 and https://www.dbrsmorningstar.com/research/360393.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (19 May 2022).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include the Issuer, the servicer, and Citibank, N.A., which comprise, in addition to the information received at issuance, the investor report as of August 2022 and the quarterly servicer report as of July 2022.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Clarice Baiocchi.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the base case):
-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 252.1 million, EUR 256.7 million, EUR 275.8 million and EUR 280.3 million at the A (low) (sf), BBB (high) (sf), BB (high) (sf), and BB (sf) stress levels, a 5% and 10% decrease in the base case recovery rate.

-- DBRS Morningstar concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a confirmation on the Class A1 notes at A (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a confirmation on the Class A1 notes at A(low) (sf).

-- DBRS Morningstar concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a confirmation on the Class A2 notes at BBB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a downgrade on the Class A2 notes to BBB (low) (sf.

-- DBRS Morningstar concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a confirmation on the Class B notes at BB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a downgrade on the Class B notes to B (low) (sf).

-- DBRS Morningstar concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a downgrade on the Class C notes to B (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a downgrade on the Class C notes to CCC (sf).

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 9 December 2021

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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